In the News

Chinese Drywall Liability: Who’s on the Hook?

Chinese Drywall
Liability: Who’s on the Hook?

Legal action is heating up in lawsuits over defective
Chinese drywall. Imported mostly during the boom years of 2004
through 2006, the material emits offensive-smelling sulfurous
gases that blacken copper wiring, damage or destroy air
conditioner coils, and irritate the eyes, nose, and throat. The
damage and complaints are most widespread in Florida, but
they’ve sparked lawsuits in other states as well. Many of
those suits have now found their way to a class-action
“multidistrict litigation” process in the U.S.
District Court for Eastern Louisiana, presided over by U.S.
Judge Eldon Fallon.

Assigned to the case in June, Fallon has focused on a handful
of suits in which the plaintiffs allege only property damage
— not health problems. These “bellwether”
cases are intended to quickly establish the basic common facts
about the drywall and its emissions and to determine where the
law assigns responsibility — with the homeowners
themselves, the builders, the drywall installers, the drywall
distributors, the importers, the original manufacturers in
China, any of their various insurance carriers, or some
combination of parties. Trials could begin as soon as
January.

To organize the process, Judge Fallon has appointed two
attorney “steering committees,” one each for the
plaintiffs and the defendants. And because home builders have
unique interests both as defendants (sued by homeowners) and as
plaintiffs (suing drywall manufacturers, installers, importers,
or insurance companies), Fallon took the unusual step of
appointing a third “home-builder steering
committee” to advocate the builder point of view.

“The only true defendant in these cases is going to be
the manufacturer,” Miami attorney Robert Brown III told a
New Orleans lawyers conference in June. “Every other
participant is going to be either a pure
plaintiff like the homeowners that my firm
represents, or a combination of plaintiff and defendant.
Everybody upstream from the homeowners is going to be looking
to move the ball uphill as a plaintiff to get money, and also
downhill as a defendant.” Basically, everybody is hoping
that the responsibility will fall with the Chinese — but
in building-defect lawsuits, it’s not unusual for the
cost to get spread around. Here’s a quick look at the
various stakeholders and the ways they are exposed to
loss.

Homeowners. Although homeowners are plainly the
victims in this case, the remedies available to them vary in
complex ways, depending on state law. One option is to file an
insurance claim with the homeowners’ insurance carrier.
But in Florida, insurance companies have denied the claims,
saying that defective construction is not covered. Some
homeowners have even had policies terminated or renewals
refused after filing a claim for Chinese drywall damage.

When homeowners turn to builders for a repair, they could run
into other problems. Florida, for example, has a “right
to repair” home warranty law in effect that allows
builders a six-month grace period before a homeowner can sue
(even if the builder is in bankruptcy). But when a builder has
gone bankrupt, the deadline for filing a claim in the
bankruptcy proceeding may expire before the builder’s
“right to repair” grace period does, leaving
homeowners in the lurch.

Lennar Homes, a major national builder with a large presence
in Florida, has addressed its Chinese drywall problem head-on,
moving homeowners into temporary lodging while the drywall is
removed and replaced and other damaged building components are
repaired. But attorneys have cautioned that it’s not
clear whether any remediation will pass muster in the long run
— to date, there is no established standard for
remediating contaminated homes.

Some attorneys have argued that removing bad drywall before a
court has acted destroys evidence in the lawsuit; homeowners
who want someone else to pay, they suggest, should leave the
drywall in place. But if you don’t remove the bad
drywall, the damage to metals in the home is progressive
— meaning that a defendant could try to argue that the
homeowner, builder, or anyone else who could have acted to
remove the drywall is partially to blame for any damage.
It’s a dilemma for homeowners. However, California
attorney Patrick Schoenburg says courts will likely give
homeowners plenty of slack on that point: “You could
certainly preserve enough of the drywall to protect the
evidence. And there is a duty to take reasonable steps to limit
the ongoing damage — the question there is what’s
‘reasonable.’ I think that while damage to copper
wire and things may be happening, reasonable steps probably
would not include having to remove all the drywall from your
house, unless you clearly have the means to do so and there was
some easy, well-known, accepted way to do it — which
there is not.”

Even after the damage does get fixed, real estate appraisal
expert John Kilpatrick told the New Orleans conference,
repairing a defective home usually leaves behind a loss in
value called “stigma,” a perceived inferiority that
reduces the repaired home’s market price compared with
other homes on the market. And in fact, Kilpatrick said,
further repairs often can make a stigmatized house
more expensive to own and live in. Ultimately, homeowners may
have to eat at least part of that so-called “diminution
of value.”

Builders. For the most part, builders are likely to
be held responsible to homeowners — at least for repair
costs and possibly also for the loss of market value. In turn,
the builders can try to collect on general liability insurance
policies (as Lennar Homes has said it plans to do). But
insurers are trying to avoid paying based on what’s known
as a “pollution exclusion” — language in many
policies that excludes coverage for things like toxic chemical
spills or acid rain, and that has been stretched in some cases
to deny coverage related to building-product off-gassing.

“The absolute pollution exclusion is where the fighting
is going to be most heavy with respect to whether a
builder’s or contractor’s liability for Chinese
drywall is covered by its commercial general liability
policy,” said Pennsylvania attorney Robert Stickley at
the conference.

Subcontractors. Home builders — along with
homeowners — could also turn to drywall installers for
relief. Ordinarily, trade contractors don’t represent a
deep pocket for product-defect lawsuits; furthermore, many
drywallers — like many builders — have gone broke
in the current recession. Nevertheless, the insurance coverage
wrinkle could make the subs a fat target in this case: Their
policies often name the builder as a “named
insured,” and depending on the language, this coverage
for the builder may not involve any pollution exclusion. Even
if a sub has gone out of business, his insurance company may
not have — and his old policy might still pay off.
“Some of my clients have made the most money suing
subcontractors,” Dallas attorney Sandy Esserman told the
conference. “Why? They usually have fantastic insurance
programs.”

Whether a sub’s insurance policies will cover builders
or homeowners in drywall cases will depend on the policy
language and the facts of the particular case. But the legal
issues involved will also be treated differently by courts in
different states, thanks to the legal concept of “choice
of law”: When you sue an insurance company, the suit
could be tried under the law of the insurance company’s
home state, the law of your home state, the law of the state
where the damage occurred and the claim arose, or even, if the
court so chooses, the law of some other state that is involved
in some way.

Manufacturers. Ultimately, it’s a handful of
Chinese manufacturers who created this problem when they
manufactured drywall using minerals, chemicals, and organic
materials that U.S.-made drywall typically does not contain.
But like everyone else, Chinese companies are acting to protect
their assets. One company, Taishan Gypsum, has simply
stonewalled — failing even to show up in court to answer
the complaint. Judge Fallon in September issued a
“default judgment” against Taishan, essentially
finding the company guilty in absentia.

U.S. product liability attorneys usually shy away from
pursuing overseas defendants, because suing in international
courts is expensive and slow, and foreign governments such as
China will not enforce damage judgments reached in U.S.
domestic courts. But lawyers in this case say that a range of
options are being considered to get the attention of the
Chinese — seizing foreign vessels in U.S. ports that have
transported the drywall, for instance, and suing U.S. investors
who have an ownership stake in the Chinese manufacturing firms.
Plaintiffs attorney Russ Herman, for one, seems to think that
Chinese manufacturers are not immune. “I think we can
bust the dam in this case,” he recently told The
Associated Press. With tens of thousands of homes affected by
the problem drywall, and with repair estimates running at
$100,000 per house and more, there are countless homeowners,
builders, and subcontractors who hope he’s right.
— Ted Cushman

OSHA Announces 2009’s
Top Safety Violations

OSHA has released its preliminary report on 2009’s
most frequently cited safety violations, and once again
scaffolding tops the list, with 9,093 citations. Overall, the
number of violations has increased almost 30 percent from 2008.
The agency’s final report will be released by the end of
the year. Here is the list, with the number of violations cited
in each category.

1. Scaffolding / 9,093

2. Fall protection / 6,771

3. Hazard communication / 6,378

4. Respiratory protection / 3,803

5. Lockout-tagout (equipment safeguards) / 3,321

6. Electrical (wiring) / 3,079

7. Ladders / 3,072

8. Powered industrial trucks (including forklifts) /
2,993

9. Electrical (general) / 2,556

10. Machine guarding / 2,364

Texas Requires Water-Saving Toilets

Texas recently became the second state — after
California — to require high-efficiency toilets, or HETs,
in all new residential and commercial construction. HETs use
1.28 gallons of water per flush (gpf), which is 20 percent less
than the current 1.6-gpf federal standard. In both states, the
new rule takes effect in January, at which point manufacturers
have to certify that 50 percent of the toilets sold in the
state are HETs. By January 2014, all of the toilets sold in
those states must be HETs. The Texas law also sets maximum
showerhead flow rates at 2.5 gallons per minute and urinal
flush volumes at 0.5 gpf.

The Texas law is the first to reference the EPA’s
WaterSense program and its list of over 200 certified HET
toilets from more than 20 manufacturers (see
epa.gov/watersense/pp/find_het.htm). Qualified toilets have to
be third-party tested to receive the WaterSense label. In
addition to meeting ASME water-use standards, eligible toilets
also have to pass the EPA’s performance guidelines, which
are based on the MaP (maximum performance) testing protocol
(see In the News, 9/06).

Exempt from the Texas law are toilets with “atypical
designs,” such as tankless toilets and those with
wall-mounted tanks. These fixtures — along with toilets
in daycare facilities and correctional institutions — can
still use up to 2 gpf. And in a concession to opponents of the
bill who argued that the new standards will lead to clogging in
older sewer lines, local governments with infrastructure
problems will be allowed to opt out of the HET requirement.
— Andrew Wormer

Offcuts

• One hundred twenty-two softwood sawmills
across the U.S. and Canada have closed since 2007,
resulting in the permanent loss of more than 10
billion board feet (bbf) of production capacity,
according to an analysis of data compiled by the
U.S. Forest Service’s Forest Products
Laboratory. Softwood production — which
peaked at 74.9 bbf in 2005 — is projected to
fall to less than 39 bbf by the end of 2009.
Sawmills have been particularly hard hit by the
slump in home building, which accounts for about 45
percent of annual lumber consumption.

• With the popular $8,000 tax credit for
first-time home buyers extended until next June and
a new $6,500 credit available for certain existing
homeowners who buy a new house, bargain hunters may
want to check out Casa Teresa, the official show
home for the 2007 International Builders’
Show. Vacant since that event, the
6,600-square-foot mansion with leather floors and
ceiling inlays is currently listed at $1,999,850,
less than half the original asking price.
It’s one of 650 homes for sale in the
Orlando, Fla., area in the $1.2 million to $4
million price range.

• The news from the NAHB isn’t all bad.
The group has introduced a new logo, “the
first rebranding of NAHB in the association’s
67-year history,” according to a
spokesperson. Meanwhile, membership in the
organization has declined from a peak of 256,000 in
May 2007 to 190,000 in August 2009, forcing the
group to cut its staff by 25 percent over the past
year.

• Until recently, shingle thefts were
generally limited to a few squares at a time and
occurred mainly on construction sites. But thanks
to sky-high shingle prices, thieves are now
targeting warehouses and hauling off
tractor-trailer loads of the product. In Texas,
more than $4 million worth of shingles have been
stolen this year. Investigators speculate that
thieves are stockpiling in anticipation of
hurricanes, tornadoes, and other storms, which are
typically followed by surges in demand. In
response, suppliers are beefing up security, adding
GPS tracking equipment to their trucks, and adding
paint to their packaging to help track stolen
shingles.